The insultingly simple secret of successful traders

No trader gets it right every time, says John C Burford. That's why you must always have a plan in place for when your trades don't work out.

Yesterday was one of those days when the markets behave just how you expect them to.

The Dow was as close to a perfect example of my trading methods as I was likely to find. So I broke out the video camera and used it for the basis of a new video tutorial for Trading for Profit Academy members.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

It was an illustration of how to combine my three methods tramlines, Elliott waves and Fibonacci to analyse the markets in real time.

Naturally, I was not 100% confident that the trade would work out (in fact, it didn't! More on that later).

Advertisement - Article continues below

But the key message was that my methods show you the right place to place a trade, and the right place to set your protective stop loss (to minimise your risk in case you are wrong).

The secret of trading

In fact, minimising losses on your losing trades is one of the most disregarded rules of trading. I know that's true, because I've read about it in my email inbox over the past few weeks.

I've received countless emails from traders who have been caught out by the huge volatile swings in the Dow (and other stock indexes). Many did not use a sensible stop-loss policy, and suffered the consequences.

So what is the secret of good trading? Simply this: with disciplinelose as little as possible on your losers and let your winners make your profits.

It's so simple as to be obvious. But it's a subtle idea, one which takes a long time to master.

For example: always place your stops so that you know in advance what your maximum loss will be. Remember, no trader on earth wins every bet, so do not expect that of yourself.

Advertisement - Article continues below

Also, never fall in love with any trade. I find generally that the stronger I believe in it, the less likely it is to work out. Isn't that strange?

In fact, some of my best trades have been those where I had little faith and appeared unlikely to work out.

My textbook example


I had a superb tramline pair working with great touch points and a prior pivot point from late December (shown on the chart as a PPP). OK, that gave me a solid pair of long-term tramlines.

Next, I zoomed into the most recent rally since the beginning of February, using the hourly chart. This view revealed that an Elliott-wave pattern was developing:


Clearly, I have a valid Elliott wave count complete with a long and strong wave 3 and a momentum divergence at wave 5 (I've shown this as a red bar).

So, we have

Advertisement - Article continues below

a hit on the upper long-term tramline,

a complete Eliott wave pattern, and

a break on the short-term tramline.

All of those combined to suggest a high-probability bet that the Dow was about to fall.

Let's zoom in for a closer look:


How I bet on this

I knew where to place my trade. But no matter how confident I am, I always place my stop-loss in advance to protect me in the event that I am wrong.

Advertisement - Article continues below

That is a whole subject in itself. But for our purposes, we can simply apply my 3% rule: your stop-loss should be placed in such a way that your maximum losses from this trade would be 3% of your total account.

In this case, I bet the market would fall from the 17,660 level on Thursday morning with my protective stop-loss at 17,700.

How did the trade work out?


Well, I was blown away! The market just kept on climbing past all of my Fibonacci levels and crashed through my upper tramline. It was the equivalent of a 100-to-one nag winning the Derby!

That trade was a loss. But it was allowed for beforehand. I didn't shed any tears. I took a 3% loss, and moved on to the next trade.

And that's all there is to it. Do your homework and find low-risk trades. When you're right, enjoy your wins. When you're wrong, have a plan in place so that you don't lose much money.

Advertisement - Article continues below


Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019